Question 1

Consider the following two statements: (i) In a consolidation of ﬁrms A and B, ﬁrm A's shareholders are given shares of ﬁrm B and vice
Versa.
(ii) In a consolidation of ﬁrms A and B, both ﬁrms merge their assets.
A)(i) is correct, (ii) is incorrect.
B)(ii) is correct, (i) is incorrect.
C)Both (i) and (ii) are correct.
D)Both (i) and (ii) are incorrect.
E)A consolidation is the same as a merger.

Accepted Answer

Statement (i) describes a stock swap, which is a common type of acquisition where the shareholders of the target company (B) are given shares of the acquiring company (A), and vice versa. This is not a consolidation or merger where the assets of both companies are combined. 
Statement (ii) describes a consolidation or merger where both A and B merge their assets to create a new entity. This is different from a stock swap where one company acquires the other. Hence, statement (ii) is correct and statement (i) is incorrect. 
Therefore, option (B) is the correct answer. 
Option (E) is also incorrect as a consolidation is not the same as a merger. While both terms refer to the combining of companies, a merger involves two or more companies joining together to form a new entity, while a consolidation involves the combining of assets and liabilities of two or more companies into a new entity.

Question 2

Defensive merger tactics are designed to thwart unwanted takeovers and mergers.Do such activities work to the advantage of equityholders all of the time? Are these types of activities ethical? Who do you think beneﬁts most from these activities?

Accepted Answer

The answer of Defensive merger tactics are designed to thwart...

Question 3

Sometimes the management of a target ﬁrm ﬁghts a takeover attempt even when that attempt appears to be in the best interest of the shareholders.Why would management take this stance?

Accepted Answer

The answer of Sometimes the management of a target ﬁrm...

Question 4

Consider the following two statements: (i) Event studies show that returns on the buyer's equity are positive around the time of the
Announcement of sale, suggesting that sell-offs create value to the buyer.
(ii) Event studies show that acquisitions are often sold off down the road.
A)(i) is correct, (ii) is incorrect.
B)(ii) is correct, (i) is incorrect.
C)Both (i) and (ii) are correct.
D)Both (i) and (ii) are incorrect.
E)None of the above.

Accepted Answer

(i) is incorrect because event studies typically show that returns on the buyer's equity are, on average, zero or negative around the time of the announcement of an acquisition, suggesting that acquisitions do not always create value for the buyer. (ii) is correct because empirical evidence shows that a significant portion of acquisitions are indeed sold off or divested in the years following the acquisition, indicating that not all acquisitions meet the strategic or financial objectives that motivated them.

Question 5

The empirical evidence strongly indicates that the equityholders of the target ﬁrm realize large wealth gains as a result of a takeover bid but the equityholders in the acquiring ﬁrm gain little, if anything.Although there exists no deﬁnitive answer as to why this is the case, several possible explanations have been proposed.List and explain three of these possible explanations for the minimal returns to the acquiring ﬁrm's equityholders.

Accepted Answer

The answer of The empirical evidence strongly indicates that the...

Question 6

Firm V was worth £450 and Firm A had a market value of £375.Firm V acquired Firm A for £425 because they thought the combination of the new Firm VA was worth £925.What is the synergy
From the merger of Firm V and Firm A?
A)£50
B)£100
C)£475
D)£500
E)None of the above.

Accepted Answer

The value of the new Firm VA after the merger is £925. If we subtract the individual value of Firm V (£450) and Firm A (£375) from this total, we get £100 as the synergy created from the merger of these two firms. Therefore, the answer is B.

Question 7

Consider the following two statements: (i) Making amendments to ensure a classiﬁed or staggered board is a classic way of deterring a
Takeover after the company is in play.
(ii) A standstill agreement occurs when the target, for a fee, agrees to accept the holdings of the
Acquirer.
A)(i) is correct, (ii) is incorrect.
B)(ii) is correct, (i) is incorrect.
C)Both (i) and (ii) are correct.
D)Both (i) and (ii) are incorrect.
E)(ii) is only correct if (i) is incorrect.

Accepted Answer

The answer of Consider the following two statements: (i) Making...

Question 8

Consider the following two statements: (i) In the presence of a u-shaped average cost curve, you are willing to pay a premium for a target if
It brings you closer to the optimal size.
(ii) In the presence of a u-shaped average cost curve, ﬁrms operating at minimum average cost are
Most likely to be acquirers.
A)(i) is correct, (ii) is incorrect.
B)(ii) is correct, (i) is incorrect.
C)Both (i) and (ii) are correct.
D)Both (i) and (ii) are incorrect.
E)(i) and (ii) only hold in a hostile takeover.

Accepted Answer

Statement (i) is correct because as the average cost curve is u-shaped, getting closer to the minimum point will bring the costs down and increase efficiency. Therefore, paying a premium to acquire a target that brings the acquirer closer to the optimal size would be beneficial.

Statement (ii) is incorrect because the firms operating at minimum average cost will already be at the optimal size, and as a result, they are less likely to acquire other firms. The acquirers are more likely to be those firms that are still operating at a higher cost and have room for improvement in terms of efficiency.

Question 9

Firm A is planning on merging with Firm B.Firm A will pay Firm B's equityholders the current value of their equity in shares of FirmA.Firm A currently has 2,300 shares of equity outstanding at a
Market price of £20 a share.Firm B has 1,800 shares outstanding at a price of £15 a share.The
After-merger earnings will be £6,500.What will the earnings per share be after the merger?
A)£1.67
B)£1.78
C)£1.83
D)£1.87
E)£1.92

Accepted Answer

The answer of Firm A is planning on merging with...

Question 10

Acquiring ﬁrms should:
A)First value the target as a stand-alone ﬁrm.
B)Second value synergies.
C)Third value the merger.
D)A and B.
E)A, B, and C.

Accepted Answer

The answer of Acquiring ﬁrms should:
A)First value the target as...

Question 11

Firm A is planning on merging with Firm B.Firm A will pay Firm B's equityholders the current value of their equity in shares of FirmA.Firm A currently has 2,300 shares of equity outstanding at a
Market price of £20 a share.Firm B has 1,800 shares outstanding at a price of £15 a share.What is
The value per share of the merged ﬁrm?
A)£19.00
B)£19.18
C)£19.44
D)£20.00
E)£20.33

Accepted Answer

The answer of Firm A is planning on merging with...

Question 12

Firm A is planning on merging with Firm B.Firm A will pay Firm B's equityholders the current value of their equity in shares of FirmA.Firm A currently has 2,300 shares of equity outstanding at a
Market price of £20 a share.Firm B has 1,800 shares outstanding at a price of £15 a share.What is
The value of the merged ﬁrm?
A)£73,000
B)£75,000
C)£76,667
D)£77,778
E)£78,000

Accepted Answer

The answer of Firm A is planning on merging with...

Question 13

Consider the following two statements: (i) The higher the price of the bidder's equity, the more likely it is that the bidder wants to pay with
Cash.
(ii) The acquirer's equity price generally falls upon the announcement of an equity-for-equity deal.
A)(i) is correct, (ii) is incorrect.
B)(ii) is correct, (i) is incorrect.
C)Both (i) and (ii) are correct.
D)Both (i) and (ii) are incorrect.
E)Acquirers do not hold equity.

Accepted Answer

When a bidder's equity is highly valued, they are more likely to use it as currency for acquisitions, not cash. Acquirer's equity price often falls in equity-for-equity deals due to dilution concerns.

Question 14

Consider the following two statements: (i) A leveraged recapitalization is only recommended if the acquiring ﬁrm's debt level was below the
Optimum before the recapitalization.
(ii) With a leveraged recapitalization, the equity price of the target may rise because of the
Increased tax shield from greater debt.
A)(i) is correct, (ii) is incorrect.
B)(ii) is correct, (i) is incorrect.
C)Both (i) and (ii) are correct.
D)Both (i) and (ii) are incorrect.
E)None of the above.

Accepted Answer

A leveraged recapitalization can increase the equity price of the target due to the increased tax shield from greater debt, making statement (ii) correct. However, statement (i) is incorrect because a leveraged recapitalization is not solely recommended based on the acquiring firm's debt level being below the optimum.

Question 15

Firm V was worth £450 and Firm A had a market value of £375.Firm V acquired Firm A for £425 because they thought the combination of the new Firm VA was worth £925.What is the NPV from
The merger of Firm V and Firm A?
A)£0
B)£50
C)£425
D)£450
E)None of the above.

Accepted Answer

The NPV of the merger can be calculated by subtracting the acquisition cost from the present value of the future cash flows generated by the newly formed firm. 
NPV = (VA - 425) - (V + A)
Given that VA = 925, V = 450, and A = 375, 
NPV = (925 - 425) - (450 + 375) = 50 
Therefore, the best choice is B, with an NPV of £50.

Question 16

Consider the following two statements: (i) The main purpose of vertical acquisitions is to make technology transfer of closely related
Operating activities easier.
(ii) Acquisitions can result in tax reductions through the use of unused equity holdings.
A)(i) is correct, (ii) is incorrect.
B)(ii) is correct, (i) is incorrect.
C)Both (i) and (ii) are correct.
D)Both (i) and (ii) are incorrect.
E)(i) and (ii) only hold in a hostile takeover.

Accepted Answer

Vertical acquisitions are primarily aimed at controlling the supply chain, not just technology transfer. Acquisitions can lead to tax benefits, but not specifically through unused equity holdings.

Question 17

Consider the following two statements: (i) The more predictable cash ﬂows of acquirer and target, the easier it is to assess merger
Synergies.
(ii) Because of the merger, the synergies are equally shared between acquirer and target.
A)(i) is correct, (ii) is incorrect.
B)(ii) is correct, (i) is incorrect.
C)Both (i) and (ii) are correct.
D)Both (i) and (ii) are incorrect.
E)(ii) is only correct if acquirer and target are equally big.

Accepted Answer

Statement (i) is correct as the ability to assess merger synergies depends on the predictability of cash flows of both the acquirer and target. Statement (ii) is incorrect because the sharing of synergies between acquirer and target depends on the negotiated terms of the merger, and may not necessarily be equal.

Question 18

When a ﬁrm acquirers all of another ﬁrm's assets:
A)It circumvents getting approval of the selling ﬁrm's shareholders.
B)It often faces a holdout by minority shareholders.
C)Both (i) and (ii) are correct.
D)Both (i) and (ii) are incorrect.
E)Firms cannot directly purchase each others assets.

Accepted Answer

When a firm acquires all of another firm's assets, it is not buying the company itself, but only the assets. Therefore, there is no need to get approval from the selling firm's shareholders. Additionally, there should be no holdout by minority shareholders because they are not shareholders of the selling firm anymore. Choice E is incorrect because firms can purchase each other's assets.

Question 19

Describe the three basic legal procedures that one ﬁrm can use to acquire another ﬁrm, and brieﬂy discuss the advantages and disadvantages of each.

Accepted Answer

The answer of Describe the three basic legal procedures that...

Question 20

Consider the following two statements: (i) In a merger, the bidding ﬁrm can deal directly with the shareholders of a target ﬁrm via a tender
Offer.
(ii) Complete absorption of one ﬁrm by another requires a merger.
A)(i) is correct, (ii) is incorrect.
B)(ii) is correct, (i) is incorrect.
C)Both (i) and (ii) are correct.
D)Both (i) and (ii) are incorrect.
E)(i) and (ii) only hold in a hostile takeover.

Accepted Answer

The answer of Consider the following two statements: (i) In...

Quiz 28: Mergers and Acquisitions

Consider the following two statements: (i) In a consolidation of ﬁrms A and B, ﬁrm A's shareholders are given shares of ﬁrm B and vice Versa. (ii) In a consolidation of ﬁrms A and B, both ﬁrms merge their assets.

Defensive merger tactics are designed to thwart unwanted takeovers and mergers.Do such activities work to the advantage of equityholders all of the time? Are these types of activities ethical? Who do you think beneﬁts most from these activities?

Sometimes the management of a target ﬁrm ﬁghts a takeover attempt even when that attempt appears to be in the best interest of the shareholders.Why would management take this stance?

Consider the following two statements: (i) Event studies show that returns on the buyer's equity are positive around the time of the Announcement of sale, suggesting that sell-offs create value to the buyer. (ii) Event studies show that acquisitions are often sold off down the road.

Firm V was worth £450 and Firm A had a market value of £375.Firm V acquired Firm A for £425 because they thought the combination of the new Firm VA was worth £925.What is the synergy From the merger of Firm V and Firm A?

Consider the following two statements: (i) Making amendments to ensure a classiﬁed or staggered board is a classic way of deterring a Takeover after the company is in play. (ii) A standstill agreement occurs when the target, for a fee, agrees to accept the holdings of the Acquirer.

Acquiring ﬁrms should:

Consider the following two statements: (i) The higher the price of the bidder's equity, the more likely it is that the bidder wants to pay with Cash. (ii) The acquirer's equity price generally falls upon the announcement of an equity-for-equity deal.

Firm V was worth £450 and Firm A had a market value of £375.Firm V acquired Firm A for £425 because they thought the combination of the new Firm VA was worth £925.What is the NPV from The merger of Firm V and Firm A?

Consider the following two statements: (i) The main purpose of vertical acquisitions is to make technology transfer of closely related Operating activities easier. (ii) Acquisitions can result in tax reductions through the use of unused equity holdings.

Consider the following two statements: (i) The more predictable cash ﬂows of acquirer and target, the easier it is to assess merger Synergies. (ii) Because of the merger, the synergies are equally shared between acquirer and target.

When a ﬁrm acquirers all of another ﬁrm's assets:

Describe the three basic legal procedures that one ﬁrm can use to acquire another ﬁrm, and brieﬂy discuss the advantages and disadvantages of each.

Consider the following two statements: (i) In a merger, the bidding ﬁrm can deal directly with the shareholders of a target ﬁrm via a tender Offer. (ii) Complete absorption of one ﬁrm by another requires a merger.